There is a lot of noise in the system this week questioning when we’ll see the first fruit of Microsoft’s acquisition of Skype. I think it is important to put this acquisition in context, because I find people’s expectations a bit naive.

Skype has been part of Microsoft since mid-October 2011. Sure the acquisition was announced in May 2011, and certainly discussions between the companies on ways to work together could have been going on for many months before that. But on that day in May when the ink on the agreement between the companies was still wet a funny part of (U.S. at least) anti-trust law kicked in. Neither company was allowed to make any changes to their product plans, strategies, business plans, etc. until the transaction closed. The only allowable activities were around planning for what would happen once the acquisition was complete. This is meant to keep the two companies “whole” in case the transaction is blocked by regulators. But sadly it means that anything that Microsoft and Skype want to do together couldn’t even be started on until mid-October. Why haven’t we seen anything out of the acquisition yet? Well, it’s only been 3 months!

While the impact of anti-trust law is not a Microsoft-specific factor, other factors are. As soon as you become part of Microsoft the pressure becomes intense to make your product a Microsoft product. How quickly can you move to the proper installation technology? Help technology? Meet globalization guidelines? Address all of the legal requirements Microsoft is subject to around the world? And perhaps most importantly, bring your products into line with the Security Development Lifecycle (SDL) process. You can continue shipping existing products without addressing these issues, but as soon as you release a new one you have to be on the path to it being a Microsoft product.

No you don’t have to have everything “Microsoftized” in a single release. For example on the SDL front you likely have to do an evaluation to see where you are, address anything serious, and then seek exceptions to ship with more minor issues (e.g., False Positives in your code). Those exceptions don’t last forever, so after that first release you are going to have to devote resources to finish the SDL work as soon as practacle.

There is more flexibility on fronts other than the SDL, but still there will be pressures to address them quickly. Let me take a legal example, the placement of international borders and the names of places. Where these are in conflict Microsoft (and other companies) have had to make decisions on how to present them (e.g., on maps) that balance the requirements of the conflicting parties. Failure to do so can result in Microsoft products, and not just the offending product, being banned from sale in those countries. Imagine releasing a Microsoft Skype and having a China ban the sale of Windows and Office because Skype offended the Chinese government (even though as a standalone company Skype was allowed to slide on addressing China’s concerns). In addition to its immediate negative business impact, the PR hit is unacceptable.

Beyond the integration impacts I’ve mentioned it is also important to decide what you want to do that immediately says “we’re a Microsoft product now”. In other words, show some positive benefit of the combination. Usually that means some kind of real integration with other Microsoft products. The most obvious one of those for Skype would be to support the use of Live ID as an alternative to Skype’s own identity system. Is it necessary that they do this in a first release, no. Would it immediately send a message and add 100s of millions of users to Skype’s user base? Yes! Are they doing this? Eventually of course. But would they hold the first release to make an initial stab at it (e.g., still require creation of a Skype ID but allow it to be linked to a Live ID) for a first release? I would.

I expect new Microsoft Skype products to start shipping later this year, perhaps as early as this spring (depending on what they were working on prior to May 2011 and how much they try to Microsoftize things). But we all have to keep our expectations in check. The acquisition process is not pretty, and the real work of integrating the companies and the products has only been going on for 3 months.

5 Responses to Skype: Get real about what to expect after the Microsoft acquisition

The deal has been finalized in october and as you mentioned we could not expect anything significant soon. What I’m really curious to see is how much Skype is going to change Microsoft revenue in this quarter (19th Jan). Will it cover as much as lower PC sales? It’s responsible for 25% of international calls as they claimed after all.
More interestingly, I’d like to see if currect bad Microsoft relationship with carriers gets any worse.

If anything the closing of the Skype deal will have a negative impact on Microsoft’s Q2FY12 resuts, and be an minor drag on earnings going forward. Skype’s pre-merger revenue was at about a $250 Million per quarter run rate and it was basically a break-even business. So Microsoft’s top-line will move imperceptively and its bottom-line won’t move at all (except for acquisition costs, which will drag it down a bit initially). The long-distance business is a pure commodity at this point so no one will ever directly make a lot of money providing it. For example, Industry pioneer IDT (NET2Phone, Penny Talk, and other services) has not been putting up very good quarters lately. Microsoft’s play isn’t about directly turning the Skype business into a material one, it is about making the rest of its products more attractive and indispensible to business and consumers. Sure Steve will welcome the extra direct reveue, and push them to become profitable so they aren’t a drag on earnings. But the real financial contributions help elsewhere.

Let’s just take a simple example of where Skype can, over the next 12 months, make a huge contribution to Microsoft. Apple introduced Facetime as one of the differentiating features of the iPhone 4, iPad 2, and latest MAC OS versions. But of course Facetime is limited to those platforms. With Skype Microsoft not only has a competitive response for its own platforms, but one that has reach to all platforms and real potential to connect a billion people in a very short time frame and two billion not long afterwards (for example with Skype-enabled devices in developing countries). If they exploit the Skype asset well it will make Windows Phone, Windows 8 Tablets and PCs(!) far more useful than Facetime and the best voice/video platforms in the industry. It will also enable Microsoft Lync, it’s enterprise VOIP and conferencing software, and the rest of Office to take a major leap forward in the next generation of Information Worker technology. And that is a high revenue/high margin opportunity. Conferencing (including telecommuting) in particular is the real potential growth area for information worker products.

Skype is all about being part of Microsoft’s “secret sauce”, and not about the revenue stream it directly generates.

Well if any other company comes up with an alternative to Skype then I am gone for good. Already I see Microsoft pushing their ads thorugh Skype with an upgrade. I also see that they somehow know I have a facebook acount and know when I am online or not… who is doing the spying here?? I certainly never gave any of the two apps permission to share any of my info… these online apps are getting to big for their boots…

Many of these services weren’t doing all that bad on their own. Forcing “Microsoft-ization” upon them hurt many of these assets. Microsoft’s not alone. Look at the fallout from Yahoo’s changes to Flickr. The best thing MS could have done was to inspire the Skype devs by giving them access to MS R&D staff/resources. Then let MS R&D find ways that Skype could become integrated in MS’ offerings, without forcing Skype to act like an MS offering.

Remember, MS Netmeeting existed long before Skype. Skype made the concept work. MS still fails to understand its’ users needs and desires. I still haven’t found anyone in my field who likes the ribbon menus. Maybe they’re nice for beginners, but experienced users prefer not to be saddled with training wheels. And who the heck though the talking paperclip was something users wanted? Most of my users just wanted to strangle its neck.

Mictosoft grew Hotmail dramatically and successfully for a decade before it went into a decline, so I don’t think that one fits your purpose. WebTV was never a success to begin with and the entire concept was stupid. Oh, and Steve Perlman just tanked another one (OnLive). MSNBC was a pretty darn good success, spending many years as the number one or two news source on the web. TellMe is hard to judge. The technology lives on in Microsoft products, and TellMe itself has been spun out to continue to address the apps it was originally targetted at (e.g., call centers). Netmeeting was indeed a failure, and I see that primarily as the result of Microsoft buying the secondary player while Cisco and Citrix bought the top tier. But it wasn’t a VOIP phone service, it was a meeting service. Skype is a phone service. Microsoft made this same mistake with virualization, refusing to pay for VMware when it could have gotten it for perhaps 1/2 of what EMC paid. They’ve had to pour in untold amounts of development effort to catch up with where they would have been if they just acquired VMWare. I don’t know how to judge Yupi except that it wasn’t a big success before Microsoft got involved, and Microsoft paid less for it then the investors had put in. It’s probably a victim of the entire concept of portals fading at around the time that Microsoft acquired it.

Skype is indeed being allowed to run quite independently from the rest of Microsoft. They are trying to have the best of both worlds, which is never easy. We’ll see if they can pull that off.

Microsoft has a lot of customer bases. In terms of sheer numbers those “in the field” are a really small percentage.

So if Microsoft doesn’t try new things then it isn’t innovative, and if it does and they fail then people want to “strange its neck”? Google has tanked dozens of products this last year, where are the complaints?